While so much has been made of the considerable decline in US rig counts as the driver behind the recent price bounce in oil, Goldman Sachs’ Damien Courvalin pours cold water all over that narrative as he explains that the rig count decline is still not sufficient, in our view, to achieve the slowdown in US production growth required to balance the oil market. Worse yet, he concludes, with the producer hedging that has occurred over the past weeks and the recent wave of equity issuance, the risk that the US production slowdown will be delayed is high, meaning oil prices will need to remain lower in the coming quarters in order for the announced capex guidance and rig reduction to materialize into sufficiently lower production growth.
Via Goldman Sachs,
Current rig count implies US production growth of 600 kb/d yoy by 4Q15
US rig count continues to decline. The decline in the US oil rig count continued last week with 84 rigs down, comprising 52 horizontal rigs, 18 vertical rigs and 14 directional rigs. Like the prior week, the Permian basin oil posted another significant decline in horizontal rigs, with large cuts in the counties with the highest well productivity. While the momentum in the US rig count cuts suggests that the US rebalancing is on track, recent comments by E&Ps suggest that these indiscriminant rig cuts reflect an initial focus on cost cutting rather than asset optimization (high grading), providing limited information on the future path of the rig count.
Expanding our analysis to the Niobrara
We expand our analysis to include the horizontal rigs of the Niobrara oil play . This allows us to capture 83% of US production growth, vs. 76% with the three big shale plays previously (Permian, Bakken and Eagle Ford). This larger universe further captures 70% of US horizontal oil rigs.
Current US rig count implies US 4Q15 production up 600 kb/d yoy
Applying the methodology that we introduced last week, the current US horizontal rig count implies that US oil production growth from these four major shale plays will reach 600 kb/d yoy by 4Q15, under our assumption of continued trend growth productivity gains at the well and rig level.
Rig Counts’ Snapshot
Bottom-up Approach: Mapping US production back to the county level
In order to quantify the impact of the oil rig count decline, we decompose oil production from the four shale plays considered (Permian, Eagle Ford, Bakken and Niobrara) at the county level, separating the contribution of well and rig performance. We identify for each of the 99 counties (47 in Permian, 15 in Eagle Ford and 18 in Bakken, 19 in Niobrara) the recent rig productivity (wells drilled per rig per month) and well productivity (well production per month) and use the February 13 county level rig count to estimate production from these oil plays. This bottom-up approach matches the EIA’s measure of production relatively well for the Big 3 and Niobrara shale plays. Our county sample still captures 85% of the production growth of these four plays, and ultimately 83% of the US Lower 48 oil production growth in 2014 (Exhibits 5 & 6). We therefore find this bottom-up production breakdown of these four shale plays as a useful barometer to future US production growth.
Caveats: While our analysis does not include vertical rigs, its low count and the corresponding low productivity wells leave us comfortable in leaving them aside for now. We also do not take into account the backlog of uncompleted wells for now, with this likely to have a significantly larger impact and would bring US oil production growth above our estimates.
Which leaves 2 scenarios – one static well and rig productivity and one trend well and productivity growth… both slowing down the decline in production growth
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The Bottom Line – It’s Still not enough
The rig count decline is still not sufficient, in our view, to achieve the slowdown in US production growth required to balance the oil market. The flexibility in cutting non-contracted rigs and associated cost deflation along with the producer hedging that has occurred over the past weeks and the recent wave of equity issuance raise the risk that the US production slowdown will be delayed. As a result, we reiterate our view that oil prices need to remain lower in the coming quarters in order for the announced capex guidance and rig reduction to materialize into sufficiently lower production growth.
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